Protectionism with tariffs in your country is often seen as a benefit to companies, especially manufacturers. The idea is that when countries put a tariff on imports of products similar to yours, you gain an advantage in your domestic marketplace. If they place a 25% tariff upon similar goods entering your country, your foreign competitors essentially face a competitive disadvantage. The result is their cost to consumers is 25% higher.
Is protectionism a benefit to companies?
A 25% tariff looks like it gives you a 20% discount against foreign competition. In fact, this is the case, but the strategic implication is more complex. For example, let’s examine some situations where there was protection. In the 1970s the Trabant was the highest selling automobile in Eastern Germany. This is because Eastern Bloc countries in the Soviet sphere of influence placed import controls on cars produced abroad. This protectionism enabled Trabant, admittedly not a good car, to compete only with automobiles manufactured in other Eastern Bloc countries.
Because of protectionism, Trabant didn’t have to compete in the global market .
After the fall of the Berlin wall, the reunification of Germany and collapse of the Soviet empire, this all changed. Trabant suddenly had to face competition from West German cars as well as Japanese and American cars. Because of decades of protection against this foreign competition, Trabant was ill-prepared to compete with these vehicles. The new imports were higher quality and the new players had a much better idea of how to effectively market their cars. They knew how to sell a good vehicle in a competitive market.
Trabant, on the other hand, had very little experience with competing against such a large number of high-quality offerings. By 1998 Trabant was no longer a new vehicle you could purchase in Germany. So, the end result of decades of protection for Trabant was that they were not competitive. They had entered into a truly competitive global market and were unable to meet the challenges of competing. Nissan, General Motors and Volkswagen, among others, simply beat them out of the marketplace.
When human beings arrived in Australia, large marsupials could no longer compete in their insular environment.
Typically, insular environments eventually face global competition. Australia offers a great illustration from nature. As recently as 45,000 years ago, Australia had a thriving ecosystem where large marsupials like kangaroos were at the top of the food chain. There were also monstrous lizards up to 15 to 20 feet long that existed and hunted for prey. At that point, 45,000 years ago, a great disaster occurred. Human beings arrived in Australia. Within a few thousand years, most species in Australia that weighed over 100 pounds or 50 kg became extinct.
Like Trabant, species including 9 foot tall carnivorous marsupials and gigantic wombats thrived in their insular environment. They didn’t have to compete in order to thrive. The introduction of the deadliest predator in the world from Asia put an end to that ecosystem. Soon and suddenly, their insular environment changed, and carnivorous kangaroos and giant wombats became a thing of the past.
Will your business succeed in its future environment?
How will protectionism and tariffs impact your business? We have to ask whether your business strategically is going to be a very competitive, adaptable and successful organism. What will be the outcome? Will it succeed in its future environment or will it be the giant wombat of the next decade?
We often seek less competitive situations strategically.
Will the lack of competition weaken us? Good competition, and by that I mean fair competition, strengthens us in the long term. It forces us to examine how we can best meet the needs and preferences of our customers. This means that nationwide anti-competitive practices can weaken the entire economy even if those practices are temporary. As an example of protectionism, the Trabant shows us that even though they lasted decades, these protections were inevitably temporary. This is partly because political regimes are temporary, but it is also because the reasons which make protectionist measures popular are temporary.
Anti-competitive practices can weaken the entire economy.
So, when is it good for your country to protect your industry with a tariff or other measures? The one clear answer is that these measures can help your industry develop in the face of stronger competition from outside your country. Once an industry is well-established in a country, however, protectionism only serves to reduce the adaptability and competitive strengths of the protected industry.
For example, many countries protected their internet businesses from about 1995 to 2005. This protection enabled companies to grow and thrive without worrying about competition that may have had regulatory advantages. One example of this is that the United States made little effort to collect sales taxes from e-commerce businesses before about 2005. Companies like Amazon grew much stronger because of this protection. It also created an unfair advantage for online sellers over brick and mortar retailers. In the global economy, this was a useful choice for many countries.
Protectionism made a company like Amazon much stronger.
Brick and mortar businesses that were similar to the e-commerce businesses, however, suffered, because they had to collect sales tax. We recognize changing from a tax-free environment to one in which e-commerce businesses had to collect taxes created a crisis for many. That crisis was worth it though because it gave them only a short period to develop the ability to compete successfully.
One important lesson from this is if a country protects an industry, successful players will use that protection. They will build capabilities and competitiveness so when they lose that protection they will survive in a rough and tumble world. The best long term strategy is to view protection as temporary and strive to build lasting competitive advantages.
What is your current situation regarding protectionism?
Is your country protecting your industry from foreign competition? Are you currently seeking some kind of protection in your home country from outside competition? Whether or not these approaches make sense is a complex issue. It will affect your growth and so it should affect your strategic choices. Good strategic planning is an excellent way to evaluate the impact, the challenges and the benefits of possible future changes in your industry.
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